The rightwing Tax Foundation today released an analysis of Speaker Paul Ryan's tax plan. Not surprisingly, it found the plan would carry a relatively small price tag over the next decade, reducing federal revenues by only $191 billion.
This dubious finding sharply contrasts with an analysis released by Citizens for Tax Justice last week, which pegged the 10-year cost of the Ryan plan at $4 trillion, a figure 20 times larger than the Tax Foundation’s questionable estimate.
What explains the huge gap between these two sets of findings? The main driver is the Tax Foundation’s one-sided approach to “dynamic scoring,” the budgetary practice of assessing the fiscal impact of tax changes by looking not just at the direct effects on tax revenue, but the indirect effects of these tax policy changes on the economy. Before waving its “dynamic scoring” wand, the Tax Foundation assigns the Ryan plan a national debt-inflating $2.4 trillion ten-year cost. But the magical dynamic effects of the Ryan plan, the Tax Foundation claims, would offset all but $191 billion of that.
An additional difference between the CTJ and Tax Foundation estimates has to do with the “border adjustments” that Ryan proposes for his corporate tax. This would amount to a 20 percent tariff on imports and a tax rebate on exports. There is some controversy about whether the World Trade Organization would find such a scheme acceptable. This means that the $1.1 trillion such a scheme might raise (on a net basis) should not be automatically included in a revenue analysis of the Ryan plan. The Tax Foundation breezily asserts that the tariff would be acceptable, while CTJ thinks that it is quite unlikely. This choice explains most of the remaining difference between the two organizations’ revenue estimates.
But Tax Foundation’s use of one-sided "dynamic scoring" explains the bulk of the difference. Under the best of circumstances, dynamic scoring is fraught with uncertainty. Cutting or increasing tax collections, and cutting or increasing government spending in a way that keeps budget deficits under control, can plausibly have an effect on economic growth. But there is little or no agreement among economists on the direction of that effect, let alone its magnitude. So an economic model based on this unproven assumption is highly suspicious at best.
The Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive effect on the economy. This one-sided assumption effectively guarantees that any analysis from its model will always find that tax cuts are economically helpful--no matter how devastating their impact on the government’s ability to provide basic services--and tax increases are harmful. For example, studies have found that capital gains tax rates have no meaningful relationship to economic growth, yet the Tax Foundation has previously estimated that higher capital gains rates have such a huge negative impact on growth that raising them would lose revenue.
Further, the Tax Foundation model always finds that tax cuts for the rich will have a wildly unrealistic positive impact on the economy, in essence providing justification to policymakers who continually propose regressive tax policies that many academics have found contribute to growing income inequality.
A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy. The Tax Foundation’s unwillingness to admit that government spending can be helpful renders its analysis of the Ryan plan’s revenue impact virtually meaningless.